Welp”s Louisville: Bonds 101

Dec 11, 2007 at 8:55 pm

As a well-informed citizen, you’ve probably been bumping into the term “bonds” a lot lately. Besides being the surname of one of America’s most synthetically jacked-up athletes, bonds have also been touted as the miracle cure for many of Louisville’s most kickass drawing-board projects, including the library expansion, Museum Plaza, the new arena and reality implants for U.S. Sen. Mitch McConnell, R-Deaf.

As a non-wingtip-wearing American, you might not be all that familiar with bonds.* And you would probably rather keep it that way. But understanding bonds need not be boring .... Wait! Come back! OK, look. Whenever you see the word “bond,” pretend it says “Cards” or “cheesecake” instead. OK, ready?

To keep things simple, I’ll limit this discussion to municipal bonds, but be aware that there are many other types of bonds, such as treasury bonds, corporate bonds, James Bonds, the special bond between a woman and another woman, and sadomasochistic bonds. In short, wherever there is a government or corporation trying to do something it can’t afford and a rich investor trying to avoid paying taxes, there’s probably a bond in there somewhere.

Strictly speaking, bonds are loans. Cities commonly offer to sell bonds to investors as a way to raise cash to pay for expensive projects. The city then promises to pay the investors back over time, along with a set amount of interest, or “juice.” If the city decides to fund, say, the library expansion with bonds, it’s basically saying to investors, “Look, man, we just gotta have some library. Just a little more library, to take the edge off, dig? We’ll totally pay you back once we get some sweet library in us.”

And then the investors go, “Are you messin’ with us? Because if you’re messin’ with us, we will cut you.” And it goes on like that, eventually resulting in what is known as “debenture,” which is what the city needs when the investors knock its teeth out.

So why would investors invest in government projects when they could buy stock in corporations, which are known to be far superior at returning obscene profits? One word: taxexemption. In order to attract investors, governments make income from bonds tax-exempt, which is like tossing a dog a Slim Jim wrapped inside another Slim Jim.

Still, it might seem that taxpayers are high to choose bond funding over direct taxation. After all, bonds seem like credit cards — instead of paying as you go, you borrow money and pay it back over time at a higher rate. But taxpayers need to restrict governments from raising their taxes willy-nilly to fund projects. Otherwise, governments might invest in schools and roads and before you knew it, life wouldn’t suck and beer wouldn’t taste as good. Instead, we reserve tax revenue for our most important priorities, like invading other countries and paying off our bond debt.

When projects promise to rain money from the sky, bonds might make sense. For example, investors might look at the arena and think, “Why yes, I do believe Mr. Pitino might just be able to sell some $12 Dasani in that building.” The better financial sense a civic project makes, the more likely the bonds are to achieve the top, or Armani, rating.

But what about projects like libraries, schools and roads — necessary parts of city infrastructure that don’t automatically generate a tax base? Bonds are still the way to go, according to University of Louisville economist Paul Coomes, a man who would probably caution you not to take financial advice from a humor columnist.
“Bricks and mortar and land are generally financed with municipal bonds,” said Coomes. “But not the running of them.”

Coomes said to think of bonds more like a mortgage instead of a credit card. By carefully using bond revenue to build the library buildings, the city can attain an important quality-of-life asset it needs and investors can feel comfortable investing in assets that don’t deteriorate in value. That, unfortunately, leaves the cost of staffing and, um, books. The city is currently wrestling with the estimated $10 million-a-year cost of just that, which is a topic I’ll investigate in a future column, “Hot Librarians and Why They’re SO Worth It.”

*Also known as “government’s MasterCard.”

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